More Pain Ahead for Britons as New Cuts Unveiled

Reported by Helia Ebrahimi, Written by Holly Ellyatt

Wednesday, 26 Jun 2013 | 8:28 AM ETCNBC.com

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Rosie Hallam | Getty Images

Britain's finance minister George Osborne unveiled his plans for another round of government spending cuts on Wednesday as he tried to keep his deficit reduction drive on track despite stiff opposition to his policies.

Osborne unveiled details of 11.5 billion pounds ($17.7 billion) of spending cuts during a parliamentary speech in London. The cuts will take effect in the 2015/2016 fiscal year, when national elections are due in the U.K.

Spending on international aid, health and education was protected but all other departments were asked to offer cuts of 8 to 10 percent of their budgets.

Osborne said that the U.K.'s deficit was down by a third, that a record number of people were in work and that the economy had returned from the brink of bankruptcy, to heckles from the opposition Labour party politicians.

In a speech focusing on families and education, business and infrastructure, Osborne said that the government was committed to the U.K.'s economic recovery and would make further investments in infrastructure, enterprise, science and education, announcing a 300 billion pound spending program until the end of decade.

One hundred billion pounds worth of infrastructure projects will be announced on Thursday, he said.

The speech follows weeks of tense negotiations between the finance ministry and government ministers trying to protect their departments from cuts. Osborne said the spending round was part of his plan to move Britain "from rescue to recovery."

Osborne told parliament it was not possible to reduce the deficit without asking everyone to take part, but that those with the broadest shoulders should bear the brunt of cuts. "We will not make our children pay for mistakes made in the past," he said.

Economists and former politicians expressed mixed views in response to the spending review.

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Former chancellor Norman Lamont said it was a mistake to protect certain departments.

"I don't think anything should be protected, I think you need cuts right across the board," he told CNBC on Wednesday. "The government has chosen to ring-fence certain departments but the consequences of that is that you have larger cuts in the areas that are not ring-fenced, that's the choice they've made."

Support for Britain's austerity agenda has been eroded in recent months. Among the most high-profile critics was the International Monetary Fund, which said the country was cutting too hard and too fast. The country also lost its prized triple-A credit rating as the economy failed to pick up.

Lamont, who was finance minister under conservative prime minister John Major in the early 1990s, told CNBC that the U.K. would recover, albeit slowly. He was supportive of spending cuts.

"It takes a long time to turn the tanker around, " Lamont told CNBC on Wednesday. "And in order to get the debt down you have first to reduce the amount we're spending year by year, the annual deficit, which has come down by over a third but that process has got along way to go."

Despite cutting spending aggressively, weak economic growth and a costly welfare system have set back the government's original plans to wipe out by 2015 a budget deficit that stood at 11.2 percent of gross domestic product in 2009/10.

The latest official forecasts show that by 2017/18 Britain will still be spending more than it recoups in tax, to the tune of 2.3 percent of GDP.

Brooks Newmark, Conservative MP and Member of the Treasury Select Committee told CNBC that Osborne had got the balance right between growth and austerity, and had little "little room to manoeuvre after inheriting a huge debt and huge deficit,"

"I suspect the cap on welfare spending will be one area of focus and infrastructure spending will be another area of focus," he told CNBC on Wednesday ahead of the "Spending Review."

"The devil is in the detail but the departments that have already felt the brunt of these cuts will continue to feel the brunt of the cuts right up to the election, I suspect," he added.

Newmark said in order to "turbo-charge" growth, the government needed to invest and put money into "shovel-ready" projects to prompt immediate growth in the jobs market.

Around 3 billion pounds of money saved is expected to be ploughed back into infrastructure spending, the Treasury said. Details of the the government's capital spending plans will be announced on Thursday. "We need quick and decisive action on the big decisions that will move projects from blueprints to building," John Cridland of the Confederation of British Industry, which represents nearly a quarter of a million businesses, told Reuters.